Cato White Papers and Miscellaneous Reports

Tax Cuts and Balanced Budgets: Lessons from the States

September 17, 1996

Stephen Moore and Dean Stansel

Stephen Moore is director of fiscal policy studies and Dean
Stansel a fiscal policy analyst at the Cato Institute

Executive Summary

The states can serve as valuable "laboratories of democracy" on
the issue of whether tax cuts can lead to higher economic
growth and balanced budgets. This study examines the state
experience with tax increases and tax cuts in the 1990s. We compare
the economic and fiscal results in the 10 states that
increased taxes the most with the results in the 10 states
that cut taxes the most.

The tax-cutting states have not only balanced their budgets; they
also have much larger budget reserves (7.1 percent of state
expenditures) than the 10 tax-increasing states (1.7 percent).
The Moody's bond ratings are higher in the states that cut
taxes than in the states that raised them. Cutting taxes at
the state level improves the fiscal condition of the state,
contrary to predictions of higher deficits.

The tax-cutting states have economically outperformed the
tax-raising states in the 1990s. The economies of the
tax-raising states grew by 27 percent (in current dollars) from
1990 to 1995. The economies of the tax-cutting states grew by
33 percent over that period. Even on a per capita basis, the
tax-cutting states saw a faster rise in income than the tax
raisers.

Income for a
family of four grew by $1,600 more in the tax-cutting states
than in the tax-raising states.

Americans
continue to vote with their feet against tax hikes. In the
1980s roughly 1,000 people every day left the highest tax
states for the lowest tax states. In the 1990s the population
has grown by 4.2 percent on average in the 10 tax-raising states.
But population has grown by 7.4 percent in the tax-cutting
states--two percentage points above the national average.

Jobs are much
more prevalent in the 1990s in the tax-cutting states. The 10 tax-raising states
created zero net new jobs from 1990 to 1995. The tax-cutting
states gained 1.84 million jobs, an increase of 10.8 percent.